International Business: The International Business Environment

Export control of dual-use products

A particularly important form of export control involves high-technology goods. Many technologically advanced countries limit the export of so-called dual-use products that may be used for both civilian and military purposes.

Use of accounting reserves

Which are accounts created in a firm's financial reports to record foreseeable future expenses that might affect its operations.

Institutions are

"rules of the game"

Currency risks

(Financial risk) refers to the risk of adverse fluctuations in exchange rates. Currency risk arises because international transactions are often conducted in more than one national currency. When currencies fluctuate significantly, the value of the firm's assets, earnings, and operating income can be reduced. The cost of importing parts or components used in manufacturing can increase dramatically if the value of the currency in which the imports are denominated rises sharply. Inflation and other harmful economic conditions experienced in one country may have immediate consequences for exchange rates due to the growing interconnectedness of national economies.

Communication

(Non-verbal communication) - Facial expressions - Hand gestures - Intonation - Eye contact - Body posture/ positioning

Country risks

(political risk) refers to the potentially adverse effects on company operations and profitability caused by developments in the political, legal, and economic environment in a foreign country. Country risk includes the possibility of foreign government intervention in firms' business activities. E.g. governments may restrict access to markets, impose bureaucratic procedures on business transactions, and limit the amount of earned income that firms can bring home from foreign operations. The degree of government intervention in commercial activities varies country to country. E.g. Singapore and Ireland characterised by substantial economic freedom. In contrast, Chinese and Russian governments intervene regularly in business affairs. Country risk also includes laws and regulations that potentially hinder company operations and performance. Critical legal dimensions include property rights, intellectual property protection, product liability, and taxation policies. Nations also experience potentially harmful economic conditions, often due to high inflation, national debt, and unbalanced international trade.

Language

- Delineates cultural groups - Shapes ones perceptions of the world - Filters observations and perceptions - Provided important clues about the cultural values of the society - Offers indications about the diversity of a country's population

Differences in legal systems

- Common law - Civil law - Religious law - Bureaucratic law The National legal systems vary dramatically for historical, cultural, political and religious reasons. The rule of law, lawyers, the burden of proof, the right to judicial review and the laws themselves differ from country to country.

The Economic environment: Impact on Capital Markets

- Evaluating the performance of firms incorporated in different countries. - Assessing the riskiness of potential loans.

Examples: Cultural differences in Entrepreneurship

- Hong Kong, the whole family works tirelessly to make it a success. - US, friends put up their money for the entrepreneur. - Turkey, friends will ask the entrepreneur to hire their sons and nephews. - India, the admin system will impose a staggering amount of red tape.

Social structure

- Individuals, families and groups - Social stratification (where society ranks categories of people in a hierarchy, status, power, and wealth) - Social mobility (the movement of individuals, families, households, or other categories of people within or between social strata in a society)

In business, culture affects:

- Managing employees - Communicating and dealing with distributors and other business partners - Negotiating and structuring business ventures - Developing products and services - Preparing advertising/ promotional materials/ international trade fairs - Interacting with current and potential customers

Culture isn't:

- Right or wrong (it is relative, and different people have different perceptions) - About the individual (Is is about groups and shared values) - Inherited (culture is derived from the social environment)

Dealing with the tax authorities

A firms accounting records form a basis for assessing its income tax burden. In Germany, such procedures are detailed explicitly and follow the German tax laws.

Values and attitudes

- Time - Age - Education - Status

The Economic environment: Differences in Accounting practices

- Valuation and revaluation of assets - Valuation of inventories - Dealing with the tax authorities - Use of accounting reserves

The 4 risks of Int. Business

1. Commercial 2. Currency 3. Country 4. Cross-cultural

Characteristics of cuture

1. Learned behaviors 2. Interrelated 3. Adaptive 4. Shared

PESTLE Analysis

1. Political 2. Economic 3. Social 4. Technological 5. Environmental 6. Legal

Embargos

A comprehensive sanction against all commerce with a given country- may be imposed by countries acting in unison or alone.

Sanction's

A country may attempt to induce a second country to change an undesirable policy by imposing sanctions—restraints against commerce with that country. Sanctions may take many forms, such as restricting access to high-technology goods, withdrawing preferential tariff treatment, boycotting the country's goods, and denying new loans.

The roots of National Differences

A country's accounting standards and practices reflect the influence of legal, cultural, political, and economic factors. Because these factors vary by country, the underlying goals and philosophy of national accounting systems also vary dramatically.

Civil law

Based on a codification, or listing of what is and isn't permissible.

Religious law

Based on the officially established rules governing the faith and practice of a particular religion. A country that applies religious law to civil and criminal conduct is called a theocracy. E.g. In Iran, a group of mullahs, determine legality or illegality through their interpretation of the Koran, the holy book of Islam.

Example: Abuse of Property rights

Burberry in dispute in China over a trademark of their iconic checked pattern and the use of this illegally within other firms to produce fakes.

Implications of Halls high low context approach

By looking at the way different countries communicate, it makes it easier for firms undertaking globalisation as they are able to see who they should tailor their business operations.

The tech. environment

Can add value to a firm: - Resource base - Govnt. investment in infrastructure and human capital - Tech transfer - Protection of intellectual property rights

Repatriation

Countries can also constrain foreign MNC's by imposing restictions on their ability to repatriate (return to their home countries) the profits earned in the host country.

Extraterritoriality

Countries may also attempt to regulate business activities that are conducted outside their borders, known as extraterritoriality. E.g. firms are vulnerable to the U.S antitrust lawsuits if they engage in activities outside the US that diminish competition in the Us market.

The economic environment

Currency risk Accounting practices- asset valuation Foreign taxation Pricing issues

Cultural Intelligence (CQ)

Defined as an individuals capability to adapt effectively to situations of cultural diversity as a potential predictor of intercultural negotiation effectiveness.

Political risk assessment

Democracy or dictatorship? - Is power concentrated in the hands of one person or one political party? Free market or government control? - Does the country normally rely on the free market/ government controls to allocate resources? - How much contribution is the private sector expected to make in helping government achieve overall economic objectives? Does the government view foreign firms as a means of promoting or hindering its economic goals? Arbitrary change to policies or rule of law? Stability of the existing government?

Copyright

Exclusive legal rights of authors and publishers to publish and disseminate their work.

Trademarks

Exclusive legal rights of firms to use specific names, brands, and designs to differentiate their products from others.

Dispute resolution in Int. Business

Four questions must be answered for an international dispute to be resolved: - Which country's law applies? - In which country should the issue be resolved? - Which technique should be used to resolve the conflict: litigation, arbitration, mediation, or negotiation? - How will the settlement be enforced?

Example: Laws in France

French television stations are required to air at least 40-percent home-produced content, with another 20 percent coming from Europe before American TV soap operas even get a look in. Cinema-goers pay a levy on each ticket to help fund the French film industry, which many believe could not survive without such support in the face of Hollywood's dominance. Products of creative industries, such as music and cinema, were excluded from free-trade agreements. Also proposed an iTax on portable tablet devices to tax the sales of multinational corporations that avoid paying many local dues because of their location.

Institutional transitions

Fundamental and comprehensive changes introduced to formal and informal rules of the game that affect firms as players.

Examples: CQ

Google Walmart Unilever Coca-cola McDonalds

Halls high low context approach

High context: - Establish social trust - Personal relations and goodwill are value - Agreements emphasise trust - Negotiations are slow and ritualistic (Chinese, Korean, Japanese) Low context: - Get down to business first - Expertise and performance are valued - Agreements emphasise specific, legalistic contract - Negotiations are as efficient as possible (German, Swiss, Scandinavian)

Domestically orientated laws

Impacts: - Firms domestic operations (managing workforce, financing operations, marketing products, developing and using technology. - Int. competitiveness of domestic firms (may indirectly affect the domestic firms to compete int. by increasing their costs, and reducing their price competitiveness related to foreign firms) - Business practices of foreign firms operating outside the countries borders (firms whose products are geared to the export market alter their production techniques to meet the regs. of the importing countries)

Example: French Laws

In GE's bid to buy some assets of France's Alstom for more than $15.6 billion continues, the French government, which opposes the deal, is trying to get new powers that would allow it to intervene in foreign takeovers. 2014

Transfer risk

In which the government interferes with a firm's ability to shift funds into and out of the country.

Operating risk

In which the ongoing operations of a firm or the safety of its employees are threatened through changes in laws, environmental standards, tax codes, terrorism, armed insurrection, and so forth.

Ownership risk

In which the property of a firm is threatened through confiscation or expropriation.

New dimension of Hofstede's culture theory

Indulgence orientation (Suppressing gratification/ allowing gratification) - To extend to which a society allows for human drives related to enjoying life and having fun.

Intellectual property

Intangible property the result of intellectual activity.

Elements of culture

Language Communication Religion Values and attitudes Social structure

Formal institutions

Laws, regulations, and rules - may be imposed by home countries and host countries

Patents

Legal rights awarded by government authorities to inventors of new products or processes.

Property rights

Legal rights to use an economic property (resource) and derive income and benefits from it.

Positive impacts of MNC's on host countries

MNCs affect every local economy in which they compete and operate. E.g. Western supermarket chains (Carrefour) enter the Chinese market, offer Chinese consumers greater selection, national brands, and high standards of hygiene. MNCs make direct investments in new plants and factories, creating local jobs, provide work for local contractors, builders, and suppliers. MNCs pay taxes, which benefits the economy to improve education, transportation etc. Technology transfer can have positive local effects.

Negative impacts of MNC's on host countries

MNCs compete directly with local firms, the MNCs may cause these firms to lose both jobs and profits. MNCs may have significant political impact, either intentionally or unintentionally. Their size often gives them tremendous power in each country in which they operate. Also, there is always the possibility that this power may be misused. Even when it is not, MNCs are often able to counter efforts by host governments to restrict their activities by threatening to shift production and jobs to other locations. MNCs can exert a major influence on the cultures in which they operate. As they raise local standards of living and introduce new products and services previously unavailable, people in the host cultures develop new norms, standards, and behaviors. Some of these changes are positive, such as the introduction of safer equipment and machinery, better health care and pharmaceuticals, and purer and more sanitary food products.

Valuation and revaluation of loans

Most countries accounting systems begin with the assumption that a firms assets should be valued on historical cost basis, where an asset is carried on the firms books according to the assets original cost, less depreciation. Due to inflation, the market value of an asset differs among national accounting systems.

Laws directed against Foreign firms

Nationalisation Expropriation Confiscation Privatisation Repatriation

Nationalistion

Often when leftist governments obtain power, they choose to transfer ownership of resources from the private to the public sector.

Types of IPR

Patents Trademarks Copyright

Macropolitical risks

Political risks that affects all firms in a country.

Micropolitical risks

Political risks that affects only specific firms or firm within a specific industry.

Example: Brinks

Ran afoul of these laws when its Belgian subsidiary declared bankruptcy as a result of its high labor costs. Affected unions promptly sued the company for failure to negotiate severance pay as the law required in such cases.

Cross cultural risk: Polycentric orientation

Refers to a mindset in which a manager develops a greater affinity with the host country in which he/she does business.

Cross cultural risk: Geostrategic orientation

Refers to a mindset where the manager is able to understand a business of market without regard to national boundaries. (Managers should strive for this)

Cross cultural risks

Refers to a situation or event where a cultural miscommunication puts some human value at stake. Cross-cultural risk is posed by differences in language, lifestyles, mindsets, customs, and/or religion. Values unique to a culture tend to be long-lasting and transmitted from one generation to the next. These values influence the mindset and work style of employees and the shopping patterns of buyers. Language is a critical dimension of culture and is a window on people's value systems and living conditions. Such challenges impede effective communication and cause misunderstandings. Miscommunication due to cultural differences gives rise to inappropriate business strategies and ineffective relations with customers.

Cross-cultural literacy

Refers to an understanding of how cultural differences across and within nations can affect the way business is practiced.

Commercial risks

Refers to the firm's potential loss or failure from poorly developed/executed business strategies, tactics, or procedures. Managers may make poor choices in areas like the selection of business partners, timing of market entry, pricing, creation of product features, and promotional themes. While such failures also exist in domestic business, the consequences are usually more costly when they are committed abroad. In a foreign market, terminating business partners can prove costly due to regulations that protect local firms. Marketing inferior or harmful products, falling short of customer expectations, or failing to provide adequate customer service may harm the firm's reputation and international performance.

Cultral clustering

Researchers have identified culturally distinct clusters of nations. Each cultural cluster reflects a shared history, religion, economic development, regional proximity, and other factors. Clustering nations into culturally similar groups is helpful for summarising the similarities and differences among societies. I.e. Germanic Europe: Austria, Belgium, Germany, Netherlands, Switzerland.

Intellectual property rights (IPR)

Rights associated with the ownership of intellectual property.

Laws directly affecting Int. business transactions

Sanctions Embargos Export control of dual-use products Extraterritoriality

Institution-based view

Success and failure of the firms are enabled and constrained by institutions.

Privatisation

The conversion of state-owned property to privately owned property. Although not strictly an issue of the host country control, privatisation is the opposite of nationalisation and creates opportunities for int. business.

Common law

The foundation of the legal systems in the UK, and former colonies: US, Canada, Australia, India, New Zealand etc. It is based on the cumulative wisdom of judges decisions on individual cases through history which create legal precedents.

Hofstede's Five (+1) Dimensions

The model of national culture consists of 6 dimensions that represent independent preferences for one state of affairs over another distinguishing countries from each other. The country scores on the dimensions are relative, as we are all human and simultaneously we are all unique. In other words, culture can be only used meaningfully by comparison. 1. Social orientation (collective/individual) 2. Power orientation (power tolerance/respect) 3. Uncertainty orientation (avoidance/acceptance) 4. Goal orientation (passive/agressive) 5. Time orientation (short-term/long-term)

The political environment: political risk

The risks: 1. Ownership risk 2. Operating risk 3. Transfer risk Assessing the political climates in other countries is far more problematic. Experienced international businesses engage in political risk assessment, a systematic analysis of the political risks they face in foreign countries.

Valuation of inventories

There are significant int. differences in the use of the 2 principle methods for valuing inventories (LIFO, FIFO)

Cross cultural risk: Ethnocentric orientation

Using our own culture as the standard for judging other cultures.

Bureaucratic law

Whatever the country's bureaucrats say it is, regardless of the formal law of the land. Contracts can be made or broken at the whim of those in power.

Expropriation

When the host government compensates the private owners for their losses.

Confiscation

When the host government offers no compensation.